Asked by Maria Ojile on May 10, 2024
Verified
Norman is planning for his retirement. He initially deposits $25,000 in a retirement plan earning 4.4% compounded quarterly over 25 years. Three years later he begins another investment where he contributes $800 per quarter over 22 years. Based on monthly compounding, determine what the rate of interest will be on the final investment if he wishes to end up with $210,000.
A) 5.37%
B) 5.48%
C) 5.59%
D) 5.72%
E) 5.85%
Compounded Quarterly
The process of computing interest on a principal sum where the interest is calculated every quarter and added to the sum, leading to interest earned on interest.
Monthly Compounding
The process where interest is calculated on a monthly basis and added to the principal, allowing the investment to grow with each month.
- Ascertain the needed rate of return for forthcoming investments, taking into account initial contributions and target outcomes.
Verified Answer
JM
Jamiya MasonMay 15, 2024
Final Answer :
B
Explanation :
The correct answer is determined by calculating the future value of both investments and then solving for the interest rate needed for the second investment to reach the desired total. The first investment grows with the formula for compound interest, and the second investment's future value is calculated using the formula for the future value of an annuity. Subtracting the future value of the first investment from the desired total gives the amount needed from the second investment, from which the interest rate can be solved.
Learning Objectives
- Ascertain the needed rate of return for forthcoming investments, taking into account initial contributions and target outcomes.